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| Jacob Kostecka, CFA, is a portfolio manager at Forkson Investment Management (FIM), an asset anagement and research focused organization. After obtaining his CFA charter last month, Kostecka was transferred to the private wealth management group.One of Kostecka’s clients, Dharshi Bope, was involved in a major motorcycle accident and is in critical condition fighting for his life. Bope is a single parent with a daughter in her mid‐twenties, Praveen Nathoo. Since the accident, Nathoo has managed her father’s affairs paying all expenses, including investment advisory fees. In several conversations with Nathoo, Kostecka highlighted Bope’s low risk tolerance and investment goal of capital preservation. Nathoo has indicated her interest in managing the account more aggressively and possibly moving it to another management firm. Nathoo recently petitioned the court to appoint her full power of attorney to legally manage Bope’s affairs. Prior to the court decision, Nathoo asks Kostecka to invest her father’s account in the initial public offering (IPO) of Chatterbox, a highly sough‐tafter social media company that has yet to generate a profit.The following week, the court approves Nathoo’s request to act on behalf of her father. Going through records in her father’s home, Nathoo discovers documents showing Bope embezzled several million dollars from his employer, a real estate development company. Most of these funds were placed directly into Bope’s personal account for which Nathoo is now responsible. Nathoo informs Kostecka about her discovery; however, Kostecka does not act on this information given that this is a large account for FIM.A month later, Kostecka joins Chatterbox’s board. Based on his knowledge of the company, Kostecka believes the stock is a good investment, even though Chatterbox is not yet profitable. Buoyed by his faith in hatterbox, Kostecka ultimately purchases shares of the company’s IPO for Nathoo’s account, as well as for all clients he currently manages. When Kostecka informs Nathoo about the purchase, she shares her concern about her legal responsibilities and lack of accounting knowledge in overseeing the account. Kostecka provides Nathoo a list of recommended professionals he has worked with in the past, including attorneys and accountants. When he was in college ten years earlier, Kostecka was engaged to one of the attorneys but broke off the relationship before their wedding, while one of the accountants was Kostecka’s college roommate. Since then, Kostecka has not had any contact with the lawyer and the accountant.The Chatterbox investment is profitable on the first day of trading, as the shares double from their opening price. Kostecka tells his clients the multifactor valuation model used by FIM shows Chatterbox stock is still undervalued and FIM’s research report, due out the next day, will recommend investors hold their Chatterbox shares. However, Kostecka also tells his clients they should sell their shares because he believes hatterbox is overvalued and the stock price will fall soon. Kostecka notes he has followed through on this belief by selling his personal holdings of Chatterbox shares. Nathoo ignores Kostecka’s recommendation to sell hatterbox. Over the nextweek, the stock declines 75%.Watching Chatterbox’s severe share price decline, Nathoo becomes furious with Kostecka because he did not sell shares of Chatterbox in Bope’s account. She files a complaint with Kostecka’s supervisor, Sally Fang, CFA, claiming she was misled on the value of the IPO in the days immediately after the stock started trading. Kostecka responds to the complaint by telling Fang, “the analyst who wrote the hold recommendation on Chatterbox has only passed his CFA Level II examination. As a charterholder, I have earned the right to use the CFA designation, so I am more qualified to manage clients’ investments.” In order to build his client base, Kostecka prepares performance information that he plans to show prospective clients. He includes the firm’s composite performance based on similar client portfolios that meet the CFA Institute GIPS Standards. In addition, Kostecka prepares his own composite performance, including all accounts he manages. This presentation includes Nathoo’s account assuming she had sold her shares of Chatterbox. Along with his performance record, Kostecka provides a footnote disclosing the following language: “If your account is managed on a discretionary basis, you might expect results similar to those shown above.” |
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